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Why Working Capital Should Matter to You

Working capital is one of the most powerful and least understood drivers for supply chain managers to improve a company’s cash flow and profitability.

By Dr. Heimo Losbichler, Dr. Farzad Mahmoodi ·
November 13, 2012

Over the past few years, a global recession and tight credit markets have created a challenging environment for businesses in a variety of industries. Most recently, the uncertainties regarding the timing and the type of economic recovery have only added to the pressure. It is during such times that working capital management captures the attention of top management as the corporate goals shift from maximizing profits to securing liquidity. A 2010 Grant Thornton /World Trade survey confirms that optimizing working capital has been a top priority. Fully 90 percent of the survey respondents, who were in top management positions, reported taking some action to reduce their working capital.

The Grant Thornton study also found that the most common approaches to reducing working capital were obtaining price concessions from suppliers and extending their payment terms rather than investing in supply chain infrastructure improvements in such areas as warehousing, transportation, inventory management, and technology upgrades. Thus, it is evident that many companies that have successfully reduced their working capital may have done so at the expense of their supply chain partners.

It is widely acknowledged that effective supply chain management practices can reduce operating costs and logistics expenses, significantly impacting a company’s working capital. The leading companies recognize this, but more importantly realize that sound supply chain practices can also achieve profitable growth. In striving to lower working capital, they pursue initiatives that will not only reduce their operating costs and improve profitability, but also benefit their supply chain partners. This article will explain why working capital should matter to supply chain professionals. We begin by underscoring the impact that working capital has on financial performance and then discuss companies’ overall progress to date in creating supply chain initiatives that positively impact working capital.

The article then describes some of the limiting factors in working capital management and how supply chain managers can identify and overcome them. Finally, we offer some ideas on how supply chain managers can meet the working capital challenge going forward.

Over the past few years, a global recession and tight credit markets have created a challenging environment for businesses in a variety of industries. Most recently, the uncertainties regarding the timing and the type of economic recovery have only added to the pressure. It is during such times that working capital management captures the attention of top management as the corporate goals shift from maximizing profits to securing liquidity. A 2010 Grant Thornton /World Trade survey confirms that optimizing working capital has been a top priority. Fully 90 percent of the survey respondents, who were in top management positions, reported taking some action to reduce their working capital.

The Grant Thornton study also found that the most common approaches to reducing working capital were obtaining price concessions from suppliers and extending their payment terms rather than investing in supply chain infrastructure improvements in such areas as warehousing, transportation, inventory management, and technology upgrades. Thus, it is evident that many companies that have successfully reduced their working capital may have done so at the expense of their supply chain partners.

It is widely acknowledged that effective supply chain management practices can reduce operating costs and logistics expenses, significantly impacting a company’s working capital. The leading companies recognize this, but more importantly realize that sound supply chain practices can also achieve profitable growth. In striving to lower working capital, they pursue initiatives that will not only reduce their operating costs and improve profitability, but also benefit their supply chain partners. This article will explain why working capital should matter to supply chain professionals. We begin by underscoring the impact that working capital has on financial performance and then discuss companies’ overall progress to date in creating supply chain initiatives that positively impact working capital.

The article then describes some of the limiting factors in working capital management and how supply chain managers can identify and overcome them. Finally, we offer some ideas on how supply chain managers can meet the working capital challenge going forward.

If history is our guide, economies take a turn every nine years. Yet time and again, a strong business cycle and fading memories convince us the good times will go on forever. Ten years after the great recession, we surveyed 100 manufacturing firms to find out if businesses are ready to fight through the next recession.

Is Digital Transformation a risk or an opportunity? This webinar will detail Manufacturing industry challenges and how using IoT can address these challenges through optimizing logistics, improving processes and gaining meaningful insights.